Should Reserve Bank of India target inflation?

Should Reserve Bank of India target inflation?

Whether the Reserve Bank of India should target a particular level of inflation in its monetary policy or not has many disagreeing, including some prominent names.

Doing so (i.e. targeting inflation) was one of the key recommendations of the Urjit Patel committee report.

It also suggested adopting Consumer Price Index-based inflation as the anchor measure, with a monetary policy committee to be given a mandate to maintain the level around a specific range.

It was to be accountable for achieving this.

“I don’t personally believe in targeting inflation, particularly in developing countries like India, where 60 per cent of the Consumer Price Index, which matters more to the common person, is from food prices,” former RBI governor Bimal Jalan had said at a discussion on January 14, a few days before the Patel report was issued for public reading.

Should Reserve Bank of India target inflation?

The Patel committee members say higher food and fuel prices will give rise to inflation expectations.

“These, in turn, give rise to higher wage settlements and contribute to a wage-price spiral,” said Rupa Rege Nitsure, a panel member.

She says as 65 per cent of the population, which is growing at 1.5 per cent annually, is below the age of 35 years (and half are below 25), this will continue to create strong demand pressures for food articles and energy products.

RBI cannot afford to ignore this in its inflation management strategies.

Also, “a need was felt to move away from the multiple indicator approach to a price stability-oriented monetary policy framework, as inflation in India has remained consistently elevated (close to 10 per cent) during the post-global crisis phase and this is among the highest within the G-20 countries,” said Nitsure.

Should Reserve Bank of India target inflation?

Chinoy argues the central bank will continue to have enough flexibility to pursue other objectives. “I believe when CPI inflation is running at 10 per cent and inflation expectations are so entrenched, there is little trade-off between inflation and growth.

The idea is not to be rigid but to pursue flexible inflation targeting, wherein everyone is aware of the central bank’s target in the medium term -- which should help business planning, wage negotiations and anchor household expectations -- but leave enough flexibility for RBI to pursue other objectives in the short run,” he said.

Another issue flagged by many, including former governor Y V Reddy, is that if RBI be alone responsible for inflation targeting, this would mean the government can wash its hands off.